Citigroup Global Markets to Pay $15M Penalty to the SEC for Surveillance and Compliance Failures

The Securities and Exchange Commission said that Citigroup Global Markets (C) will pay a $15M penalty to settle charges that it did not enforce procedures and policies that would stop and identify securities transactions potentially involving the wrongful use of material, nonpublic information. Citigroup agreed to the SEC’s order without denying or admitting to the regulator’s findings.

The firm also has paid $2.5 million to advisory client accounts that were affected. That amount is how much Citigroup made from the principal transactions that resulted because of the purported compliance and surveillance failures.

According to SEC, which conducted a probe, over a period of ten years, Citigroup failed to review thousands of trades that were made by a number of trading desks. Even though firm personnel looked at reports to assess trades daily, technological errors caused several information sources regarding thousands of key trades to be left out.

As the SEC noted in its order, advanced computer systems are often now involved in automated trading. Technology oversight is key to making sure that compliance is in effect.

The Commission said that the surveillance and compliance failures happened between 2002 and 2012. Also, Citigroup is accused of unintentionally routing over 467,000 transactions for advisory clients to an affiliated market maker. This market maker executed transactions by selling or buying to clients from its account. The regulator said that Citigroup did not have the procedures and policies in place that had been designed to prevent such activity from happening.

The firm, said the SEC, should have been equipped to steer certain advisory orders away from the affiliate. Also, contends the regulator, the reason that Citigroup’s trade surveillance did not detect principal transactions for over two years was because the firm depended on a report that was not designed in a reasonable manner that would have allowed it to catch these transactions that were made through the affiliate.

Federal securities laws mandate that every firm must take reasonable steps so that misuse of material nonpublic information, which broker-dealer employees have access to, is avoided. The SEC said that Citigroup violated the Securities Exchange Act of 1934’s Section 15(g), which mandates that dealers and brokers set up, maintain, and enforce procedures and policies to prevent such erroneous uses.

The SEC also said that Citigroup violated the Investment Advisers Act of 1940’s Section 206(4) and Rule 206(4)-(7). These require registered investment advisers to put into place and execute written policies and procedures that are able to prevent Advisers Act violations, as well as violations of the Act’s rules. Citigroup, as part of the settlement, will bring in a consultant to assess and make recommendations to its trade surveillance, handling, and routing of its advisory account order.

At The SSEK Partners Group, our securities fraud lawyers represent investors that have lost money because of broker negligence, compliance failures, or other issues that could have and should have been prevented by a financial representative or a firm. Contact us today.

Read the SEC Order (PDF)